My Franchise Agreement is Expiring, Now What? (Part I of II)

Video Transcription

Hi, my name’s Jeff Goldstein of the Goldstein Law Firm in Washington, DC. We represent franchisees and dealers in disputes with their manufacturers, suppliers, and franchisors in courts around the country. What I wanted to do today is to focus, to some extent, on duration of franchise agreements, expiration of franchise agreements, and renewals or non-renewals. It’s very broad subject area and difficult to do in a short period of time, not only due to its fret, but it’s complexity. Each state has its own common law, as well as franchise statutes and unfair practices acts that will impact on the analysis.

Because these analyses are very fact intensive, you’ve also got a problem of having four or five different judges interpreting the same statutes or common law a little bit differently within each jurisdiction. One way to approach this is to look back over the last couple weeks, in my practice, and select those questions asked by franchisees and potential clients regarding duration or non-renewal. Some of the questions are pretty fundamental and rudimentary, others are more complex.

First question that I’ve been able to cull from the files and notes is, “Does the franchisor have to give a franchisee a minimum number of years or period in a franchise agreement or dealership agreement?” The answer, in general, is a resounding no. Each agreement, besides the fact that many of them are set in stone and not changed, each agreement can be negotiated in terms of term, or year, or duration. Some franchise agreements will put a particular year in, December 22, 2018, others will use a period of time, 4 years, 5 years. They usually run, and again, it’s difficult to give usual rules in these things, I’d say between 5 and 20 years. They seem to be getting a little bit shorter over time with particular rights of renewal that were also restrained. There is, I believe, there was one statute that I have seen recently that did require a minimum. I believe it was a state automobile statute, but I’ll have to come back to that. But in terms of common law obligations and obligations that a franchisor or a supplier would have to a franchisee on offering a contract in the franchise industry overall, the answer is that there’s no specific amount of time.

Second question is, “Does the franchisor have a right…have to provide a right to renew or extend the agreement?” The answer to that, also, again, let’s put statutes to the side, a common law, normal law, before any franchise laws were adopted, the answer would be no. There can be many agreements, and there are many agreements, that say you’ve got a five-year term and then they would say either the agreement expires, or would say there are no renewal terms, or it would say nothing. The fact is that if there’s nothing provided after an initial term, the franchisor is under no obligation. Again, putting aside special [SP] franchise statutes and industry, federal statutes in the automobile and petroleum industries, there is no obligation that they have to offer an extension. Most franchisors do, suppliers do, offer the possibility of a renewal, but they are tethered with very many specific requirements that don’t really spring out of the paper into the consciousness of many franchisees until their renewal time has approached and is upon them.

The next question that I’ve pulled out in this general area, “For those franchisors that do give a right to renew, what are the terms?” That’s a good question, and I get that every week. Franchisors are looking, in general, economically, to give them some type of justification in this area. They do look for a remodeling or an ability to repackage their concept after market forces have been operating for three or four years, and the fifth year comes for renewal, and some of them are 10. So there is gonna be, in almost every sophisticated distribution agreement, a requirement that the franchisee remodel. Could…very expensive, could run up to half a million bucks, 100, 200, so there is going to be, almost in every case, a requirement that the franchisee remodel.

There’s another requirement that is one that catches most franchisees and dealers, and that is that the franchisee must sign its new agreement, the renewal agreement, what are called the “then-current terms”. This means that the franchisor, over the five years subsequent to the signing of the franchise agreement by the franchisee or dealer, has increased the royalty, usually increased the marketing fees, increased the modeling requirements or modified them, perhaps increased the termination provisions, how many defaults would be appropriate to then result in a termination and things of that nature. Over time, each iteration of the franchise agreement is more and more arduous. I’d say it…beyond on average, I would say, almost in locks, across every system.

Another requirement that franchisors are…will usually impose on the franchisee, in the franchise agreement…yeah, usually, it’s memorialized that the franchisee has to carry out substantial remodeling requirements to meet new formats and refresh the look of the store or the restaurant. That’s normal and courts have upheld that.

Another requirement that is in the franchise agreement, in almost every franchise or dealership agreement, has to do with the franchisee having been required to meet all of the conditions of its operation, leading up to the renewal time. Some franchise agreements will say “substantial compliance”. Some will say that you couldn’t have had more than three defaults over a certain period of time. Others are very strict and rigid, saying that if the franchisee was ever out of compliance, that it cannot renew. Those types of things courts have not always looked favorably on, and there are ways to argue that those deviations from perfect operations were not material and that the franchisee substantially complied. But the point is, here, in answer to this question, yes, there can be a renewal that’s not naked, it can be created as contingent on the franchisee meeting certain requirements, and those have been upheld.

Now, this video is not intended to get into the franchise statutes in certain states that would govern a renewal and termination. You can look at our site. The firm site has each state broken out down to non-renewal and termination. There are some, and they’re very, very different from each other, there are some states, I think Delaware if I had to guess, I could be wrong, but I think Delaware has a just cause instead of good cause. And I think that there it does touch on the franchisors’ motive in failing to renew. But again, if you get a good franchisee lawyer who is familiar with all the different statutes, the unprotrayed practices acts, you will be able to put something together or at least get some certainty in an area that is not very clear, overall.

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Jeff, I am amazed that you were able to get the liquidated damages down that low, which allowed us to avoid bankruptcy. Until we retained you we had been dealing with hotel consultants who appeared to make little head-way in lowering the liquidated damages.